Tanzania - Mufindi Pulp and Paper Project

Document of The World Bank FOR OFFICIAL USE ONLY FILE COrY Report No. 1929-TA STAFF APPRAISAL REPORT TANZANIA MUFINDI PULP AND PAPER PROJECT December 14, 1978 Industrial Projects Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS US$1 = Tanzanian Shillings (T Sh) 8.00 T Sh 1 US$0.125 T Sh 1,000 = US$125.00 WEIGHTS AND MEASURES 1 metric ton(t) 1,000 kilograms (kg) = 2,204 pounds (lb) 1 meter (m) 3 39.37 inches 1 cubic meter (m ) = 35.31 cubic feet = 264 US gallons 1 kilometer (km) = 0.621 mile 1 hectare (ha) = 2.47 acres ABBREVIATIONS AND ACRONYMS USED ASSI - Aktiebolaget Statens Skogsindustrier, of Sweden BIS - BIS Marketing Research Limited, of the U.K. BOD - Biochemical Oxygen Demand CDC - Commonwealth 'Development Corporation Company - Southern Paper Mills Company Limited EDF - European Development Fund FAO - Food and Agriculture Organization of the United Nations FD - Forest Division (of the Ministry of National Resources and Tourism) KfW - Kreditanstalt fur Wiederaufbau NDC - National Development Corporation NIB - Nordic Investment Bank Poyry - Jaakko Poyry and Company, of Finland Sandwell - Sandwell Management Consultants Limited, of Canada SIDA - Swedish International Development Authority SIDO - Small Industries Development Organization TAC - Tanzania Audit Corporation TANESCO - Tanzania Electric Supply Company TANZAM - Tanzania-Zambia Highway TAZARA - Tanzania-Zambia Railway Authority TIB - Tanzania Investment Bank TPA - Metric Tons Per Annum TWICO - Tanzanian Wood Industry Corporation FISCAL YEAR Government July 1 - June 30 NDC and subsicliaries: January 1 - December 31  FOR OFFICIAL USE ONLY TANZANIA APPRAISAL OF MUFINDI PULP AND PAPER PROJECT TABLE OF CONTENTS Page No. I. INTRODUCTION ................. ..................................... 1 II. THE INDUSTRIAL SECTOR . .............. . . ............. 2 A. Industrial Setting ................................................... 2 B. Performance and Problems 2.......................... 2 C. Basic Industrial Strategy and the Third Five Year Plan (1977-81) ........... 3 D. Small-Scale Industry .. .............................. 4 E. Forest Resources and Industries .................... 4 III. THE SPONSOR AND THE COMPANY . .......... so* ................. . 5 A. National Development Corporation (NDC) ............. 5 B. Southern Paper Mills Company (the Company) ......... 8 IV. THE MARKET .............................................. 8 A. World Paper Markets ................................ 8 B. Past Paper Consumption Trends in Tanzania .......... 9 C. Export Markets ...... .............................. . 13 D. Prices .................... ..................................... 15 E. Organization of Marketing and Distribution ......... 18 V. THE PROJECT ............................................. 19 A. Project Concept and Choice of Technology .. ......... 19 B. Project Description . ........................ ...... 20 C. Infrastructure ..... . .............. *O.. ........... 24 D. Project Implementation and Management ............... 26 E. Employment and Training ............................ 30 VI. CAPITAL COSTS AND FINANCING PLAN ....................... 31 A. Capital Costs .................................... 31 B. Financing Plan ..................................... 33 C. Procurement ....... . . .................. .... ......... 35 D. Allocation and Disbursement of Bank Loan and IDA Credit .......... ,... ..... ..... 36 This report was prepared by A. J. Ewing and P. Lietard of the Industrial Projects Department and C.E. Keil of the Agriculture and Rural Development Department. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  -2- Page No. VII. FINANCIAL ANALYSIS ............ ............................ 36 A. Revenues .................................... o ................. .... 37 B. Operating Costs . ................ ............... .. . 38. C. Financial Projections ..... .. .... .... .......... . . 39 D. Financial Rate of Return ..... ....................... 42 E. Auditing and Reporting ............................... 42 VIII. ECONOMIC ANALYSIS AND RISKS ..... .......................... 43 A. Adjusted Costs; and Revenues for Economic Evaluation .. 43 B. Economic Rate of Return .............................. 44 C. Other Benefits ................. .. .... ................. 46 D. Risks ...................... ......................... 47 IX. AGREEMENTS ............ 48 ANNEXES 6-1 Plant Capital Cost Estimate 6-2 Price Escalation Allowances 6-3 Working Capital Estimate 6-4 Tentative Disbursement Schedules for Bank Loan and IDA Credit 6-5 Allocation of Finance 7-1 Assumptions used in Financial Projections 7-2 Manufacturing Cost Estimate 7-3 Depreciation and Amortization Allowances 7-4 Projected Sales Volume and Revenue 7-5 Projected Income Statement 7-6 Projected Cash-Flow Statement 7-7 Projected Balance Sheet 7-8 Cash Flows for Financial Rate of Return 8-1 Development of Economic Stumpage Value 8-2 Economic Rate of Return and Sensitivity Analysis MAP IBRD 13486 Mufindi Pulp and Paper Project  SELECTED DOCUMENTS AND DATA AVAILABLE IN THE PROJECT FILE A. Reports and Studies on the Sector Al. Draft Repcrt of the Tanzania Forestry Project (3 volumes). FAOQ IBRD Cooperative Programme. Rome, June 1974. A2. Report No. 1107-TA: Appraisal of the Sao Hill Forestry Project. June 1976. A3. Annual Reports of NDC for 1975 and 1976. A4. Consolidated NDC Group Company Plan, 1975 to 1977. B. Reports and Studies on the Project Bl. Pulp and Paper Mill Feasibility Study (Main Report and 9 Annexes). Jaakko Poyry & Co., Helsinki, March 1976. B2. Report on Project Concept Selected at Meeting on June 23, 1976. Jaakko Poyry & Co., Helsinki, July 1976. B3. Comparison of Alternative Sites and Updated Investment Estimate for Revised Project Concept. (Main Report and 1 volume of Annexes). Jaakko Poyry & Co., Helsinki, January 1977. B4. The Mufindi Pulp and Paper Mills Water Supply and Environmental Impact. AB Hydroconsult. Sweden, January 1977. B5. Technical Considerations and Cost Estimates. Sandwell and Company with Jaakko Poyry and Company. London, August 1978. C. Selected Working Papers Cl. Memorandum to Files: Mufindi Pulp and Paper Project Market Review. May 1976. C2. Terms of Reference and Final Report: Opportunities for an Integrated Pulp and Paper Mill in Tanzania: BIS Marketing Research Limited. London, October 1977. C3. A Note on Pulp and Paper Prices. February 1978. C4. Staff Preappraisal Report: Mufindi Pulp and Paper Project. November 1976. Industrial Projects Department December 1978   I. INTRODUCTION 1.01 The Government of the United Republic of Tanzania has requested the Swedish International Development Authority (SIDA), the Kreditanstalt fur Wiederaufbau (KfW) of the Federal Republic of Germany, the Kuwait Fund, the Commonwealth Development Corporation (CDC), the OPEC Special Fund, the Nordic Investment Bank (NIB) and the Bank to help finance a pulp and paper project near Mufindi in South-central Tanzania (Map IBRD 13486). The total financing required for the project is estimated at US$252 million, of which about US$194 million (or 77%) will be in foreign excharnge. A Bank loan of US$30 million and an IDA credit also of US$30 million are proposed. Addi- tionally, a SKr 200 million (US$45 million) grant, a DM 67 million (US$34 million) grant, a KD 5 million (US$18 million) loan, a US$20 million equiv- alent loan, a US$10.5 million equivalent loan, and a US$12.5 million loan are being considered by SIDA, KfW, the Kuwait Fund, CDC, the OPEC Special Fund and NIB respectively. 1.02 The project consists of a fully integrated puilp and paper mill to produce 60,000 metric tons per annum of industrial papers, newsprint and cultural papers. The project would also supply about 1,400 tons of pulp annually to a small paper mill in Dar es Salaam. Bank involvement in the project commenced in 1974 when the FAO/IBRD Cooperative Programme began the preparation of the Sao Hill forestry project. Subsequently, the Bank approved a loan of US$7.0 million 1/ to finance industrial plant:ations at Sao Hill to provide wood for sawmills and a pulp and paper plant. In late 1974 a study of the pulp and paper mill project started under the auspices of the Tanzania National Development Corporation (NDC) with a grant from SIDA. The study was executed by Jaakko Poyry and Company (Poyry), a well-known Finnish firm of forest industry consultants, with the technical support and assistance of the Swedish State Pulp and Paper Company (Aktiebolaget Statens Skogsindustrier - ASSI). Early in 1978, NDC entered into agreements withi Sandwell Management Consultants, Ltd. of Canada (Sandwell) to act as Project Managers, and with Poyry to act as Project Engineers. With overall guidance from ASSI these organizations have completed a detailed technical review of the project and prepared up-to-date capital cost estimates 2/. 1.03 The project was preappraised in August 1976 on the basis of a feasibility study by Poyry dated July 1976 (revised in January 1977). The project was appraised in October 1977 by a mission comprising repre- sentatives of the SIDA, KfW and the Bank. The Bank mission consisted of Messrs. Andrew J. Ewing and Philippe Lietard of the Industrial Projects Department, and Mr. Christian E. Keil of the Agriculture and Rural Develop- ment Department. This Appraisal Report incorporates the results of the sub- sequent technical review and cost estimate update undertaken by Poyry and Sandwell in mid-1978, which were reviewed by all of the potential financing institutions. 1/ Loan 1307-TA of July 12, 1976. 2/ This work was financed in part by an IDA Technical (Credit 601-TA), and in part by the Bank's Project Preparation Facility.  - 2 - II. THE INDUSTRIAL SECTOR A. Industrial Setting 2.01 At independence in 1961, Tanzania had an extremely limited indus- trial sector dominated by private firms. Three major developments have characterized the sector 1/ since that time: rapid expansion, an impressive diversification in products, and a major shift in ownership from private to public hands. The contribution of manufacturing to GDP had more than doubled by 1976 as the number of jobs in the industrial sector tripled. Furthermore, the limited range of products produced in 1961 has been significantly expanded as new plants producing a wide range of consumer goods and some intermediate and capital goods were completed. Finally, following the Arusha Declaration in 1967, the Government systematically transferred the control and ownership of the large private and foreign-owned industrial enterprises to publicly-owned parastatals. By 1974, the public sector accounted for about half of manufactur- ing value-added and employment. Presently, four ministries control 17 holding companies which have a total of 97 subsidiaries in various productive sectors. It must, however, be noted that the private sector still remains an important participant in industry (430 of 500 factories with over 10 employees are in private hands). B. Performance and Problems 2.02 Aggregate manufacturing production grew rapidly between the mid- sixties and the onset of the economic crisis in 1974. The average annual real growth of the manufacturing sector was 7.8% between 1964-75 compared to an average growth rate of 4.8% for total GDP. While this record of in- creasing output would seem to indicate satisfactory industrial performance, a detailed analysis of Tanzania's manufacturing sector indicates that pro- ductivity has been low and output has been far less than warranted by the level of investment. 2.03 The problems underlying the suboptimal performance in the sector are many. At the macro level, the Government has not yet developed the ad- ministrative capability to effectively monitor and coordinate the operations of the control systems which iwere instituted along with the increased public ownership of manufacturing entLerprises. Important components of this control system include centralized decision-making on investments, detailed alloca- tions of foreign exchange through import licensing, an extensive regime of price controls and rules of procedure operated by the National Pricing Com- mission, and wage-setting by the Permanent Labor Tribunal and the Government. 1/ For a more detailed analysis of the structure, performance, problems, and prospects of Tanzania's industrial sector, see the Bank's report: "Tanzania Industrial and Mining Sector Survey" No. 647-TA, March 31, 1975, and "Tanzania Basic Economic Report: Annex V" entitled "Industry: Perspective and Strategic Choices", No. 1616-TA, December 1977.  -3- While the Government feels these controls are needed to achieve its develop- ment goals, their effect has largely been to insulate public enterprises from the discipline of market forces. At the micro level, two additional sets of problems operate. First, performance indicators consistent with the macro control systems and clear guidelines for evaluating performance are still lacking. Managers and workers, therefore, have few motivating in- centives in Tanzania. Second, there is not only a scarcity of trained managerial personnel and skilled labor, but also most enterprises have to live with periodic shortages of other key inputs. 2.04 These issues have been raised in various Bank reports on the Tanzanian industrial sector. The Government is well aware of them and considerable discussion has taken place among Tanzanian economic and enter- prise managers on possible solutions. The Bank Group has participated in these discussions within the context of both general economic work and specific projects in the industrial sector and the Government has recently begun pragmatically addressing these issues. In particular, it has insti- tuted a number of trial incentive schemes, reduced staff in overmanned parastatals, placed an 8% limit on allowable increases in overhead costs of manufacturing firms which approach the National Price Commission for price increases, and hired foreign consultant groups to advise on operational/mana- gerial improvements for the subsidiaries and associate firms of the major industrial holding company, the National Develoment Corporation (NDC). In a major recent development the Government has welcomed private participation in small and medium scale industry. There is already evidence that this move has stimulated considerable interest in the sector. C. Basic Industrial Strategy and the Third Five-Year Plan (1977-81) 2.05 Future development of the sector will be based on the Basic Industrial Strategy adopted by the Government in 1974. The two main goals of this strategy are structural transformation and self-reliance and its main emphasis is on the use of domestic resources for domestic needs. This involves giving top priority in investment allocations to industries supplying (i) basic needs of food, shelter, health, education and transport, and (ii) producer goods which contribute to production of a wide range of industrial products. However, as it has emerged, the strategy will also permit expansion of export- oriented production, especially that based on domestic raw materials (for example cashew processing, sisal spinning, textile manufacture, and meat and leather processing). A potential problem with the Basic Industrial Strategy is that attempts to restructure the economy too quickly during this period of resource stringency may ultimately frustrate both growth and structural change. A too rapid expansion of particular sectors may lead to excessive reliance on external finance, know-how and markets, and the massive investment coordination required by the strategy may overburden the country's already weak planning capacity. Moreover, effective implementation of the strategy will require specific changes in the macro policy framework toward a protection and tariff structure which does not discriminate against backward linkage import substi- tution and does not discourage domestic production of capital goods or confer high and widely varying effective rates of protection to the producton of consumer goods.  - 4 - 2.06 The Third Five-Year Plan (1977-81) envisages an investment program of about T Sh 23 billion, of which about 27% will go to manufacturing. 1/ Projects earmarked for development and implementation under the Plan are mainly based on Tanzania's domestic resources. Among the sizeable public sector industrial projects currently under implementation with Bank Group support are the industrial complex at Morogoro, several cashewnut processing factories, the textile mill expansion at Mwanza, and a new textile mill at Morogoro. In addition, NDC is presently implementing a number of other major projects, including a tannery, a canvas mill, a bicycle plant, a farm imple- ments factory, a detergents factory, and a pharmaceutical plant. The textile plant at Morogoro was recently approved for Bank/IDA financing. 2/ D. Small-Scale Industry 2.07 The overall responsibility for small-scale industry development has been given to the Small Industries Development Organization (SIDO). SIDO's activities include providing technical and managerial consultancy services, establishing industrial estates, conducting training programs, providing marketing services and supplying machinery on a hire-purchase basis. SIDO's performance thus far has been mixed: in some areas impressive work has been done while in others little progress has been made. Specifically, while its project preparation skills are satisfactory, its impact on overcom- ing managerial and marketing problems is less so. One major issue which faces the Government is the coordination of SIDO's work with other participants in small-scale industry. The Bank Group has become involved in a pilot effort in the sector under the Second National Sites and Services Project 3/ and anti- cipates working closely with the Government in attempting to address these problems. E. Forest Resources and Industries 2.08 About one half of the total area of Tanzania, i.e., about 44.4 million hectares (ha) is classified as natural forest, the greater part of which is open woodland. There are 540 forest reserves totaling 13 million ha (or about 30% of the forest area) which serve as a source of wood and wood products, and as catchment areas. These forests, however, particularly the savanna (niombo) woodlands, have a low stocking of merchantable timber and are so widely scattered that prospects for their economic utilization and development are poor, except for small quantities of valuable hardwood for export of veneers and plywood and more significantly to meet the large domestic demand for fuelwood. 2.09 In addition to the naltural forest, there are 42,000 ha of soft- wood exotic plantations and 6,000 ha of hardwood plantations. The past planting program has averaged 4,000 ha per year, and this is expected to 1/ Of the amount proposed for manufacturing investment, it is envisaged that approximately 70% would be for large-scale projects. 2/ Loan No. 1607-TA, and Credit No. 833-TA, of July 28, 1978. 3/ Credit No. 732-TA of November 3, 1977.  - 5 - increase to 5,600 ha per year during the 1975-80 period. The plantations cover a very small area of the country, but in the future are expected to supply most of the timber required for forest industriLes. These plantation areas, located along the recently built TanZam highway, have come within relatively easy reach of the country's main consumer centers and the main port of Dar es Salaam. 2.10 Total wood consumption3 estimated as 34 milLion 3 in 1973, is expected to rise to 37 million m in 1980 and 48 million m by the year 2000. More than 95% of this total wood consumption comprises fuelwood. The demand for industrial wood and wood-basid material (mainly for sawnwood and paper and paperboard), currently 500,000 m , is expected to almost double by 1980 and to reach 3 million m by the year 2000. 2.11 Tanzania has not yet developed a sizeable forest industry. In addition to pit-sawing which is still fairly widespread, ther are over 150 small and ill-equipped sawmills producing about 160,000 m per yelr. The largest mill's annual output Intil 1976 was approximately 5,000 m and only 25 mills produced more than 500 m per year each. The Norwegian financed mill completed in 1976 by Tanzanian Wood Industry Corporation (TWICO) at gao Hill is the country's most important and currently produces some 12,000 m per year. In addition to the sawmills, there are 2 plywood mills, a particle board factory and a fiberboard mill in operation, as well as a few small paper conversion plants. Kibo Paper Industries, Limited, an NDC subsidiary, com- menced operating a small 10 ton-per-day plant using waste paper near Dar es Salaam in June, 1978. This plant is now operating well but all of the other paper and paperboard requirements of the country must be imported. III. THE SPONSOR AND THE COMPANY A. National Development Corporation (NDC) 3.01 The National Development Corporation, which is sponsoring the project, was established in 1964 with its headquarters in Dar es Salaam. It is Tanzania's largest parastatal holding company, with its plants effectively operating as separate legal and financial entities, and the country's principal instrument for industrial investment. The Southern Paper Mills Company has been established (para 3.07) as an NDC subsidiary to build and operate the project and will be the ultimate beneficiary of the proposed loan and credit. Because of NDC's overall responsibility for project implementation, the operational influence on its subsidiaries, and its position in the industrial sector (including paper), the organization, activities and financial situation are presented briefly below. 1/ 1/ A complete presentation of NDC's policies and operations was made in the Appraisal Report of the Morogoro Industrial Complex (Report No. 1213-TA of March 3, 1977).  - 6 - 3.02 NDC's nine-man Board of Directors functions as a policy making and controlling body as well as a liaison and coordinating group between NDC and the Government. The influence of the Government on financial and investment planning is strong, although there is little interference in day-to-day oper- ational matters. In 1977, Mr. A.B.S. Kilewo, former Chairman of the East African Airlines, replaced Mr. E.A. Mulokozi as NDC's Managing Director and Chairman of the Board. NDC's staff (excluding the employees in subsidiary companies) totals 247 of which 108 are professionals (including 19 expatriates) serving in five operating departments: (i) Planning and Finance; (ii) Account- ing; (iii) Manpower Development; (iv) Administration; (v) Industrial Develop- ment. The Industrial Development Department, which prepares and implements projects for NDC as well as monitoring existing operations, is organized into five Divisions. Each Division is responsible for a specific group of sectors of NDC's activities; the Pulp, Paper and Printing Division will handle the Mufindi project. 3.03 NDC holds shares in 23 operating companies of which 18 are clas- sified as subsidiaries (over 50% NDC shareholding) and 5 are associate companies (50% or less NDC shareholding). Its total portfolio is currently T Sh 264.4 million. The 23 companies operate in the following fields: metal working (7); tobacco and beverage (4); paper converting, printing and publish- ing (4); chemicals and allied products (4); leather tanning and processing (4); together, they employ about 12,000 people. Through its four subsidiaries in the printing, publishing and packaging sector, NDC converts about 50% of the present paper consumption in Tanzania, representing a sales value of about T Sh 107 million per year. 3.04 The consolidated operations of the NDC Group companies have been profitable every year since 1968, though some companies (in the fertilizer and rubber industries) experienced losses in 1975 and 1976. The overall capitaliza- tion of the NDC Group is sound with a debt/equity ratio of 12/88. NDC's finan- cial statements for the years 1971 through 1977 are presented on the following page. 3.05 Total head office administrative expenses increased to 81% of income in 1974, and had become a cause of concern. However, they were held constant in absolute terms over the 1975-77 period and as a result decreased to 32% of income in 1977, reflecting much improved organization and co- ordination of NDC's work at headquarters. 3.06 In March 1977 the Barik approved a loan of US$23.0 million 1/ to NDC for the Morogoro industrial complex, including the development of a 65 ha industrial estate and the implementation of a canvas mill, a shoe factory and a leather goods factory. Project implementation is proceeding satisfactorily and in spite of some critical delays in the appointment of consultants and in the commencement of procurement, the project is expected to be completed in July 1982 as scheduled. 1/ Loan No. 1386-TA of April 6, 1977.  - 7 - NDC FINANCIAL STATEMENTSt/ (T Sh Million) NDC Group Companies - Sales and Profits 1971 1972 1973 1974 1975 1976 1977 Sales Gross Sales 1,062.1 1,427.5 1,734.3 1,582.2 1,981.1 2,243.7 2,663.0 Profits (before taxes) 114.0 144.0 102.6 125.7 152.7 203.1 231.3 Profits as Z of ales 10.7% 10.1% 5.9% 7.9% 7.7% 9.1% 8.7% NDC Investmentsb7 429.7 450.8 336.5 281.1 341.2 428.8 287.7 Number of NDC Subsidiary and Associate Companies 42 43 31 18 23 23 23 Income NDC Income Statement Income Subsidiaries, associate and other Companies 22.0 28.4 24.1 17.3 28.5 52.4 57.0 From ST Deposits and Bridge Financing 2.4 2.8 2.8 1.3 2.2 2.7 3.0 Other misc. Income (net) 2.5 7.8 8.6 7.3 9.2 3.0 3.4 Profit (Loss) in Sale of Fixed Assets - - - - 0.1 - - Sub-total 26.9 39.0 35.5 25.9 40.0 58.1 63.4 Expenditures Head Office Administrative Expense 12.2 10.8 11.1 11.5 12.2 12.4 13.6 Financial Charges 7.2 11.2 9.4 8.4 9.7 9.6 3.7 Depreciation 0.8 1.0 1.1 1.0 1.0 0.8 1.0 Other - 0.1 1.2 - 0.7 1.8 - Sub-total 20.2 23.1 22.8 20.9 23.6 24.6 20.2 Operating Surplus 6.7 15.9 12.7 5.0 16.4 33.5 43.2 Expenditure as % of Income 75.1% 59.2% 64.2% 80.7% 59.0% 42.3% 31.9 NDC Balance Sheet Assets Current 83.4 84.6 49.5 37.2 102.4 109.5 110.5 Fixed 14.9 15.7 15.1 14.5 13.6 13.0 13.1 Investments & Loans (net) 393.2 414.3 356.4 266.5 323.9 407.1 486.0 Total 491.5 514.6 421.0 318.2 439.9 529.6 609.6 Liabilities Current 70.5 53.4 36.7 42.0 56.2 86.8 100.7 Long-term Debt 151.6 172.9 136.1 129.9 138.1 129.6 56.2 Capital and Reserves Share Capital 170.8 173.7 149.6 92.1 183.9 230.7 294.7 General Reserves 98.6 114.6 98.6 54.2 61.7 82.5 158.0 Total 491.5 514.6 421.0 318.2 439.9 529.6 609.6 Current Ratio 1.2 1.6 1.3 0.9 1.8 1.3 1.1 LT Debt/Equity Ratio 36/64 37/63 35/65 47/53 36/64 29/71 12/88 a/ Audited accounts for years ended December 31. b/ Investments in subsidiaries, associate and other companies, plus loans.  - 8 - B. Southern Paper Mills Company (the Company) 3.07 The Southern Paper Mills Company has been formed as a limited liability company under Tanzanian industrial and commercial laws. Its initial authorized share capital of T Sh 10 million (US$1.2 million) will be increased to provide for ad[ditional equity subscriptions as execution of the project proceeds. While NDC will own all the Company's shares, plant, sales and accounting management will be autonomous. The total staff of the Company, after the start of operations, is planned to reach about 1,500 people. The Company's functions during implementation and operations of the project are described in more detail in Chapter V. IV. THE MARKET A. World Paper Markets 4.01 The industrialized countries produce and consume about 95% of the world's pulp and paper. With few exceptions, countries of the developing world rely on producers in Europe and North America for the bulk of their paper supplies. Although long-run prices are generally related to the long-run development of production costs, short-term supply and demand imbalances have a marked influence on prices, particularly for the smaller consuming countries such as Tanzania. During the last period of short supply (1974-75), prices in Tanzania rose sharply, and supplies of some grades could not be obtained at any price. At the present time, international markets (particularly in Europe and Japan) remain somewhat depressed following the recent world reces- sion and although prices are now beginning to firm up again, they had fallen to an extent and are still at levels that investments in new capacity on present prices are difficult tc, justify anywhere in the world. 4.02 Recent forecasts by FAO and other international agencies suggest that by the early 1980's, shortages will once again begin to be felt for certain grades as the current slow rate of new capacity additions will not keep pace with increasing demand. At that time, rather sharp increases in prices may once again be expected. A handicap for a newcomer in the pulp and paper industry is that world market prices for paper reflect the fact that capital costs for building pulp and paper plants were considerably lower in the past than they are at present. While the cost of installing paper capacity in traditional producing countries in the past 15 years has averaged about US$550 per annual ton, this cost today has risen to between US$1,000 and US$1,800 per ton, depending on the type of paper to be produced. Since earlier installed capacity has an economic life of at least 20 years, such low cost capacity is still in operation and will have a depressing effect on world paper prices for some ltime to come. While the long-established companies in traditional producing countries can overcome this problem by averaging the return they obtain on their various plants installed at dif- ferent times, a new producer, such as Tanzania, cannot.  B. Past Paper Consumption Trends in Tanzania 4.03 Consumption of paper in Tanzania has averaged about 25,000 tons annually, over the past several years, all of which has been imported at a value of about US$15 million per annum. The use of paper is widely dis- tributed through all sectors of the economy with main consumers being news- papers, publishers of school text books, and the packaging industry. Packag- ing grades are used for goods for domestic consumption such as cement, sugar, milled products, fertilizer, and consumer goods, and for exported products such as sisal. Tanzania's printing and converting industry, while relatively new, has expanded rapidly in the past few years (para 4.05). 4.04 The following table shows imports of paper into Tanzania over the past decade. All types of paper and paperboard are included in these figures, including converted products and printed material. Tanzania - Paper and Paperboard Imports (Tons) Year Amount Year Amount 1965 10,600 1971 21,400 1966 14,200 1972 25.200 1967 14,300 1973 26,200 1968 19,300 1974 25,700 1969 16,900 1975 25,900 1970 23,100 1976 23,400 1977 22,700 Sources: East Africa Customs and Excise Department, Annual Trade Reports (1965-76). BIS Marketing Research Limited (1977). Growth in consumption averaged about 13% annually from 1965 to 1971, but only about 3% from 1971 to 1977. Over the entire period (1965-77), con- sumption increased by about 7% per annum. The sharp increase in 1972 followed by a period with relatively little change in imports is due to a combination of inventory adjustments and a general slowing down of the economy in 1974 and the following years. Although some of the country's paper imports from Sweden are financed through SIDA's grant program in Tanzania, consumption has been somewhat constrained by import restrictions due to foreign exchange shortages in recent years. The price to the final consumer is unaffected by the character of SIDA's support and is closely in line with world market prices. 4.05 The past decade has seen not only growth in paper consumption, but a marked shift in the type of imports. In 1970, almost 50% of imports were in the form of converted products or printed material, much of which came from the well-developed converting industry in Kenya. Duaring the past few years, however, Tanzania has been rapidly expanding its own converting operations.  - 10 - By 1974, imported converted products were down to 25% of all -paper and paper- board imports; in 1977 they are estimated to have accounted for less than 10%, comprising mainly printed material and sophisticated manufactures from Western Europe. 4.06 The following breakdown of paper and paperboard consumption into major grade groups is based on several market studies undertaken in recent years (para. 4.08). Tanzania - Grade Distribution of Paper and Papierboard Imports 1974-1977 Grade Average Annual Amount (Tons) (%) Cultural Papers - Newsprint 3,800 15.8 - Printing and writing paper 6,600 27.5 - Printed matter 1,000 4.2 Total 11,400 47.5 Industrial Papers a/ - Kraft packaging grades 7,700 32.1 - Boxboard 1,600 6.7 - Tissue 200 0.8 - Other grades 3,100 12.9 Total 12,600 52.5 Grand Total 24,000 100.0 a! Includes converted products. 4.07 Although there are aL large number of ultimate end-users of paper in Tanzania, approximately 80% of all paper and paperboard brought into the country is imported by one of six organizations, namely: three converters of industrial paper and board 1/, two major printing establish- ments 2/, and one Government importing agency 3/. The converting operations supply paper bags, paper sacks, corrugated cartons, and other boxes and wrappers to a wide range of industries. The two major printing establish- ments each produce a daily newspaper and a number of other periodicals, and carry out general printing of school and other books. Elimu Supplies 1/ Kibo Paper Industries Ltd, Mifuko Ltd, and Kwiga Paper Industries, all located in Dar es Salaam. Kibo is an NDC subsidiary. 2/ Printpak Ltd., and National Printing Company Ltd. Both are NDC subsidiaries located in Dar es Salaam. 3/ Elimu Supplies Ltd.  - 11 - Ltd. supplies paper for education purposes, and to most of the 60 or so small and middle-sized printing companies. The remaining 20% of paper consumed is imported by the user either directly, or through a small number of commercial importing agencies. The present system of importing and distributing paper appears to be satisfactory. 4.08 Forecasts of paper demand in Tanzania have been made in several studies: (i) two studies by Poyry, undertaken in 1974 and 1976; (ii) a Bank study carried out in 1976, which projected paper consumption on two bases: an end-use analysis and by using statistical techni,ques (correlating income and paper consumption in Tanzania and other African countries); and (iii) a study by BIS Marketing Research Limited (BIS) of the U.K., carried out in mid-1977 with a subsequent review in 1978. A graphical presentation of those projections is shown below. CONSUJMPTION AND PRODUCTION OF PAFPER 140 / , 120 / / // U. S .'. . / / 44 ,/ t.-' :92 /MUFINDI o / -'> *... - ' ,NEX P ANIO N' 0 ___ X _____ r~~~~~~~~ - --. -l iO 0 muriNDI PRODUCTIION 0 _ _ KXBO) __ 65 70 75 80 85 90 95 YEAR ACTUAL FOR ECAST World Bank - 18337  - 12 - 4.09 The following table shows comparative projected data for 1980, 1985 and 1990. Tanzania - Comparison of Various Demand Projections for Paper and Paperboard (Tons) 1977 Projections (Estimate) 1980 1985 1990 Poyry (Finland) - 1974 27,800 58,000 89,000 135,000 - 1976 27,800 50,000 75,000 110,000 Bank Analysis - end-use (1976) 27,800 47,000 66,000 93,000 - statistical (1976) 27,800 42,000 60,000 85,000 BIS (U.K.) - 1977 27,800 46,500 61,000 76,000 - 1978 22,700 a/ - 58,800 75,600 a/ Actual For the period until 1985, BIS's 1978 projection of total paper/paperboard de- mand based on a detailed analysis of end-use factors, although the lowest of these five estimates, is considered to be the most realistic. It is reason- ably consistent with the Bank's own statistical projection and any substan- tially higher projection would imply either a per capita paper consumption in Tanzania above that in other countries at a similar stage of development, or a rate of real growth of the Tanzanian economy substantially more than the 5% annual rate expected over the next decade. In the longer term, end-use analysis is not so useful for estimating demand. The BIS projection from 1985 to 1990, suggesting an average annual growth in demand of 5.2% annually, would appear to be overly conservative in view of the past growth rates and the anticipated future economic performance of Tanzania. For the period beyond 1985, therefore, it has been assumed that a growth rate of at least 7% could be achieved leading to a total demand for paper and paperboard of 82,500 tons in 1990. If, in fact, a lower rate of growth in the domestic market is achieved this would require a higher level of exports and the impact of this on the pro- ject's financial and economic rates of return is examined in the sensitivity analyses in Chapters VII and VIII. In terms of the major grades groups, based on the end-use analysis of BIS, the demand forecast is broken down below between "basic grades", which t:he proposed MIufindi mill can produce, and "other grades", which it cannot easily produce and hence does not intend to make under the proposed project.  - 13 - Tanzania - Paper Demand Projections by Grades (Tons) 1974-77 1982 1985 1990 a/ Basic Grades: - Newsprint 3,800 4,100 4,500 6,300 - Printing & writing paper 6,600 16,500 18,700 26,200 - Kraft linerboard 2,900 2,000 3,100 4,300 - Kraft paper 5,700 16,200 16,500 23,100 - Total 19,000 38,800 42,800 59,900 Other Grades b/ 5,000 13,800 16,000 22,600 Total 24,000 52,600 58,800 82,500 a/ Projected at 7% annual growth rates from 1985 levels. b/ Included in the "other grades" category are test liner, fluting, box- board, tissue, etc., as well as specialty kraft and cultural grades which could not easily be made in the Mufindi mill. Some of these grades are produced in the 3,000 TPA waste paper based mill recently constructed by Kibo Paper Industries Ltd, an NDC subsidiary, in Dar es Salaam. As its own production expands, Kibo will require about 1,400 TPA of pulp to supplement its waste paper and this will be supplied by the Mufindi mill. C. Export Markets 4.10 The proposed paper mill is designed to operate with an average output (depending on the paper grades produced) of 60,000 tons annually (together with 1,400 tons of pulp for the Kibo mill) and by 1987 is expected to be technically capable of producing at this level. As can be seen from the above table, the Tanzanian demand for the type of paper the Mufindi mill will be producing initially will not approach 60,000 tons per year until 1990, and thus for several years the mill will have some excess production capacity. It is anticipated that this surplus will be exported, although at the same time Tanzania will be importing other types of paper thereby remain- ing a net importer of paper and paper products in most years. Quantities of domestic production, imports, domestic demand and exportable surplus are shown in the following table.  - 14 - Tanzania - Paper Production and Trade, 1982-1990 (Thousand tons) a/ Year Production Domestic Exportable Net Kibo b/ Mufindi Total Imports Demand Surplus c/ Import 1982 7.4 3.7 11.1 41.5 52.6 - 41.5 1983 7.6 30.0 3,7.6 17.0 54.6 - 17.0 1984 7.7 42.0 49.7 9.9 56.7 2.9 7.0 1985 7.9 50.0 5-7.9 8.1 58.8 7.2 0.9 1986 8.1 56.0 64.1 8.9 62.9 10.1 (1.2) 1987 8.3 60.0 68.3 10.0 67.3 11.0 (1.0) 1988 8.5 60.0 68.5 11.1 72.0 7.6 3.5 1989 8.7 60.0 68.7 12.6 77.1 4.2 8.4 1990 8.9 60.0 68.9 16.2 82.5 2.6 13.6 1991 9.1 60.0 691.1 19.7 88.3 0.5 19.2 1992 9.3 60.0 69.3 25.2 94.5 - 25.2 a/ A number of small operations to produce hand-made paper are being considered but the total output from these plants would not exceed 200 tons annually. b/ In June 1978, Kibo commenced operation of a 10 ton per day wastepaper-based mill in Dar es Salaam producing various grades of industrial board for con- sumption in Kibo's own operations. The grades produced complement the Mufindi production. c/ From Mufindi. 4.11 In view of the relatively small volume and short-term nature of the anticipated exports, no detailed survey of possible export markets for paper from Tanzania has been undertaken. However, in 1974, the potential was briefly reviewed by Poyry who identified Zambia, Malawi, Uganda, Mozambique, Burundi and Rwanda as likely markets. BIS also examined the Zambian and Malawian markets in somewhat more detail in 1977. Import, production, and consumption figures for these countries in 1976 are tabulated below: Paper Production and Trade in Potential Export Market Countries (1976) (Tons) Apparent Country Imports Production Consumption Zambia 29,000 29,000 Malawi 14,000 - 14,000 Uganda 24,000 1,500 25,500 Mozambique 25,000 6,000 31,000 Burundi 200 - 200 Rwanda 1,000 1,000 Source: Poyry and BIS studies.  - 15 - 4.12 Consumption in these countries is growing aLt between 5 and 10% annually. Apart from a possible export pulp mill in Malawi, which would noL affect that country's demand for imported paper, the only known pulp and paper project planned in this region is a 40,000 TPA mill for Zambia, tentatively scheduled to come on stream in about 1984. If consunmption does increase at 5% annually, and the Zambian project becomes operational as now scheduled, the combined supply gap in these countries in 1985 will amount to approximately 130,000 tons of paper. The maximum expected Tanzanian exports of about 11,000 tons in 1987 will represent less than 10% of the total supply to these countries and there can be little doubt that the relatively modest export tonnages will be marketable in this area. 4.13 Although there is a very small wastepaper-based mill in Uganda and another in Kenya, the only paper mill of consequence now operating in East Africa is that of Panafrican Paper Mills at Webuye in Kenya, which started operations at the end of 1974. This mill, financed in part by IFC, is now operating at close to its production capacity of 45,000 tons annually, and is currently selling about 36,000 tons of this in Kenya. The balance is exported to neighboring countries, and to Asia and the Middle East. 4.14 The Kenyan mill has been considered as a possible source of supply to the Tanzanian market, particularly as it is currently planning an expansion to 60,000 tons annual capacity. While on the face of it this possibility would seem to have some merit in the near term, Tanzanian importers see the Kenyan exports as relatively shortlived until the domestic market in that country reaches the Panafrican mill's output; they are therefore reluctant to break established ties with traditional suppliers. In fact, it is pro- jected that by the late 1980's all of Panafrican's production will be utilized in Kenya and Tanzania would have to continue (or resume) its imports from Scandinavia and elsewhere. D. Prices 4.15 As noted above, actual prices paid by Tanzanian consumers correspond closely to the international prices for the various paper grades, with suit- able allowances for delivery to Dar es Salaam, and iLmport duties 1/ levied on some grades. However, the basis of the analysis presented in this report is that when the Mufindi mill comes on stream, mill-nelt prices will be such that the delivered prices to the customer will still be in line with world market prices, exclusive of duty. Typical recent CIF prices of paper in Dar es Salaam are as follows: 1/ With the exception of woodfree printing paper, which is admitted duty-free, all paper imports carry a 20% duty. However, sack kraft, linerboard and fluting have been allowed duty-free entry for two years to assist Tanzania's new packaging industry.  - 16 - Recent Actual Paper Prices, CIF Dar es Salaam a/ (T Sh/ton, in current terms) 1974 1975 1976 1977 Newsprint 2,800 - 3,500 3,500 4,100 3,600 - 3,700 Printing & writing 6,500 - 9,900 3,500 5,400 4,500 - 4,700 Kraft linerboard 2,700 - 4,500 3,100 - 3,900 2,900 3,300 - 3,500 Kraft Paper 4,300 - 7,000 4,700 - 6,500 4,000 - 4,800 4,200 - 5,500 a! Excluding duty. Information supplied by consuming companies. 4.16 These prices are some T Sh 600-900/ton (US$72-108/ton) above domestic Western European prices for the same paper grades, primarily because of trans- portation and handling costs. Prices in Western Europe rose very sharply from mid-1972 until early in 1975, when world demand dropped significantly. Sub- sequently prices in that market: have eased for some grades by as much as 30% but prices are already beginning to firm for certain types of paper and increases for most grades are expected within the next 12 months. As is typical in small and relatively distant markets, the prices in Tanzania rose to greater levels at the high point, and for some grades have subsequently declined further than those in Western Europe. Prices are now beginning to show signs of increasing in Tanzania reflecting the market situation in other regions. The variations in the CIF prices at Tanzania, and with them the FOB prices of the exporting countries, have been of such magnitude that to select an international price for project analysis on the basis of present or recent past prices alone is difficult. 4.17 To overcome this difficulty, the Bank has recently undertaken a study aimed at arriving at prices which would allow efficient producers in traditional paper producing areas (Scandinavia, Canada and the U.S.) to add new capacity and continue to achieve customary profit levels on their invest- ment. 1/ While this study will require continuing additional data input and updating, the resulting "Computed 1977 Prices" as shown in the following table are generally within the range of prices actually encountered in Tanzania over the past several years. Computed 1977 Paper Prices FOB/CIF Dar es Salaam and Actual Import Prices (CIF) in 1974-77 Computed 1977 Price FOB Freight and Producing Insurance to CIF Dar es Salaam Price Grade Country Dar es Salaam Computed 1977 Actual 1974-77 (US$/ton) (US$/ton) (US$/ton) (T Sh/ton) (T Sh/ton) Newsprint 430 110 540 4,320 2,800 - 4,100 Printing & Writing 630 110 740 5,920 4,500 - 9,900 Kraft Linerboard 400 110 510 4,080 2,700 - 4,500 Kraft Paper 470 110 580 4,640 4,000 - 7,000 1/ A Note on Pulp and Paper Prices. Industrial Projects Department, February 1978 (Project File, ref. C3).  - 17 - 4.18 The graph below compares historical paper price ranges during 1974-77 of the weighted average of all grades to be produced by the Mufindi mill (CIF Dar es Salaam and adjusted to 1977 terms) with the average weighted price for Mufindi's products as used in this appraisal. From the above table it can be seen that the computed prices, except for newsprint, are within the range of current term prices experienced in recent years (and thLs in constant prices were still lower than these actual prices). Furthermore the graph shows that while in 1976 and 1977 actual weighted import prices (CIF Dar es Salaam) were about 11% and 17% respectively below the weighted price assumed in the appraisal, actual import prices in the two preceeding years were above the appraisal price, in 1974 by as much as 28%. Also since international paper prices do not necessarily move in parallel for individual paper grades (see also table in para 4.15) and since the pulp and paper industry in tradi- tional producing countries is arguing that present prices are inadequate to attract new investment in the industry, it is believed that the assumed computed price (CIF Dar es Salaam, 1977 terms) used in the appraisal re- presents a realistic estimate of longer range international prices of paper. HISTORICAL PAPER PRICES-CIF DARESSALAAM (ADJUSTED TO 1977 VALUES) Weighted average for all grades in the Mufindi project 9,000 8.000 _ 0 < 7,000 - 4) r 6.000 U-' .____-- --_______ _' ---Price used in appraisal 5,000 - 4,000 - 1974 1975 1976 1977 World Bank - 18670  - 18 - 4.19 For exports it has been assumed that one-half of the tonnage avail- able for export would be shipped to adjacent countries such as Zambia, where Tanzania has a trading and freight advantage. In these cases, mill revenues have been estimated on the assumption that Tanzanian paper would be sold at a discount of 10% below the delivered price of competing sources of supply. The remaining exports would be shipped through Dar es Salaam to other ports of Africa at 20% below the assumed CIF Dar es Salaam price, reflecting stronger competition in these markets. Overall, therefore, an average 15% discount from CIF prices has been assumed for all export sales. While this substantial discount makes exports of larger tonnages relatively unattractive, the exports are small in absolute amounts (together some 46,000 tons over eight years (para 4.10)), and represent on average only some 10% of Mufindi's total pro- duction during this period. These sales more than cover production costs and are welcome in that they allow full technically available capacity utilization. E. Organization of Marketing and Distribution 4.20 At the present time, the 5 or 6 major consumers of paper in Tanzania (who account for as much as 75% of paper consumed) import directly from the producing countries, while most of the smaller consumers are supplied by Elimu Paper Supplies, the Government agency, which imports and warehouses a wide range of grades of paper. These arrangements are considered to be satis- factory for domestic sales from the proposed new operation, and their con- tinuation would facilitate the change-over from imported to domestic paper supply. Thus it is envisaged that the project will employ a small sales staff who will deal directly with the major paper consumers in the country, and directly through Elimu Paper Supplies with the smaller consumers. In arriving at expected mill-net sales revenues, a deduction of 3% of the gross sales revenue has been made to allow for the project's share of the cost of these operations. 4.21 For export sales, two alternative marketing methods are being con- sidered. In the first, the sales staff of the Company would be augmented to handle export sales directly, selling to consumers in the importing countries. In the second, the Company would sell to existing paper importers who would in turn deal with the ultimate consumers. The second method is likely to be more attractive, as it involves dealing with fewer customers and moreover with customers alreadly experienced in importing paper from a wide variety of sources. In any event, the costs of the two methods are likely to be similar, and 5% of the expected gross selling price in export markets has been allowed to recover those costs. 4.22 In the Agreement between NDC and ASSI (para 5.28), the latter has undertaken to review marketing and distribution aspects of the project and to assist NDC to devise and implement an appropriate organization well in advance of the projected start-up date. Particular attention will be paid to ensuring a smooth transition from imported to domestically-produced paper. The Company has agreed to submit to the Bank not later than December 31, 1980 detailed marketing and distribution programs for both the domestic and the export markets.  - 19 - V. THE PROJECT 5.01 The project consists of the establishment of an integrated pulp and paper mill with the capacity to sustain a production of 61,400 TPA of a combination of various grades of pulp, paper and board. Facilities to be provided include: logging roads and equipment, a chemical pulp mill with a bleach plant, a mechanical pulp mill, two paper machines with associated stock preparation and paper finishing equipment, steam and power generation equip- ment, a chlorine and caustic soda plant, related pollution abatement equip- ment, and some supporting infrastructure. At full production the mill will produce annually about 22,000 tons of kraft paper, 23,000 tons of printing and writing paper, 7,000 tons of newsprint, 8,000 tons of kraft linerboard, and 1,400 tons of market pulp. The principal project facilities will also incor- porate spare capacity eventually enabling a total of 75,000 tons of paper and board annually to be produced at minimal additional cost. The mill will be located about 15 km south of Mufindi in South-central Tanzania, some 590 km from its major market of Dar es Salaam. The site has good road and rail connections with Dar es Salaam and with other parts of the country. A. Project Concept and Choice of Technology 5.02 The project will have the capability of supplying a substantial proportion of the paper needs of Tanzania. Of necessity, this has meant that diverse and sometimes complex processes have been included. Moreover, the cost of chemicals, most of which will need to be imported, and environ- mental considerations, have required that the mill be equipped with full chemical recovery and effluent treatment facilities. This has led to a mill concept which is expensive in relation to the econoimy of the country, and to the scale of production. 5.03 Throughout the period of project preparation this problem has been recognized and simpler and less versatile mill concepts aiming at the production of fewer grades have been evaluated in an attempt to reduce project costs. Other technologies, such as mechanical pulping, semi-chemical pulping and the pulping of sisal or bagasse, have also been examined. In general these alternatives have necessitated consideration of smaller-sized plants as the decreased versatility has reduced the potential market volume. Sig- nificant reductions in plant capital costs could be achieved in some cases but there is little scope for corresponding reductions in the cost of infra- structure and related items (para 5.20). The overall effect has been a sharp loss in economies of scale and economic rates of return which did not exceed 5%. Another alternative examined has been a phased approach where certain of the facilities would be added only at a later date. If this approach were to be followed, a very large proportion of the ultimate ex- penditures would be required in the first phase and although training and start-up would be simplified, the adverse financial and economic implications of high initial expenditures for delayed benefits are severe. The project concept now being proposed represents a reasonable compromise betwen project cost and complexity on the one hand, and economic benefits on the other.  - 20 - 5.04 Within this basic concept, there remained a number of technical choices with respect to the degree to which labor is substituted for capi- tal, and the extent to which the mill is appropriate to Tanzanian condi- tions. Although the designs proposed by Poyry in the original feasibility study did not fully reflect a commitment to appropriate technology, NDC and the Bank (together with the other co-financing agencies) have consistently recognized the importance of such an approach. During the past several months, Poyry and Sandwell have been involved in developing the final design concepts for the project and each company has brought to this activity its respective experience in similar projects in other developing countries. The outcome of this work is a technical package which is somewhat less complex than that originally envisaged, without compromising product quality or environmental acceptability. The concept was reviewed in detail by tech- nical representatives of the potential financing institutions at meetings held in Helsinki in July 1978 and in London in August 1978. General agreement was reached that the concept and technology were appropriate to Tanzanian condi- tions. B. Project Description 1. The Mill 5.05 As noted previously, the mill will produce pulp, newsprint, print- ing and writing paper, kraft linerboard, and kraft paper. Fiber furnishes for these grades will comprise mechanical and chemical pulp in the case of newsprint and for some types of printing and writing paper, and chemical pulp for all other grades. Chemical pulp will be produced using the standard sul- phate process which will provide maximum strength properties together with the economies and pollution abatement benefits to be obtained from chemical recovery. 5.06 A suitable mill-site area has been located and secured below the escarpment south of the town of Mufindi, on the Kigogo-Ruaha river. The Tanzania-Zambia railway (TAZARA) passes through this area and a road is planned up the escarpment to link with the main highway to Zambia (Map IBRD 13486). The average 3waterflow in the Kigogo-Ruaha river is about 5 cubic meters per second (m Is) whiSh , while well in excess of the projected mill process requirement of 0.2 m Is, may give rise to some concern with regards to effluent dilution. However, appropriate effluent treatment facilities are planned (paras. 5.17-5.19) which are designed to minimize downstream effects even during periods of low flow. Below the mill-site, the Kigogo-Ruaha flows through rugged and virtually uninhabited country for approximately 49 km where it joins the Mnyera river whose minimum flow is of the order of 30 m /s. 5.07 Detailed technical descriptions of the processes and equipment pro- posed are contained in the various consultants' studies. The pulp mill will be of conventional design, utilizing batch digesters. A four-stage bleach plant will use chlorine, caustic soda and hypochlorite produced at the mill site using Tanzanian salt and a diaphragm-cell electrolytic process.  - 21 - 5.08 The paper mill will comprise two paper machines of the same size and basic design. Linerboard and kraft paper will generally be produced on one machine, while the second will generally produce newsprint and other grades of printing and writing paper. The paper mill will include stock preparation systems, an additives preparation plant and a finishing depart- ment. It is anticipated that about one-half of the printing and writing paper, and smaller quantities of other grades will be delivered in sheets. Equipment for sheeting, sorting and packing has therefore been incorporated in the proposed plant design. 5.09 Services within the mill will include a waLter treatment system, process steam and power supply systems, and maintenance and technical sup- port services. Water will be pumped from the adjacent Kigogo-Ruaha and screened mechanically. After screening the water will be suitable for some process purposes but for more critical uses, further treatment with chemical flocculation and filtration is envisaged. Steam will be generated within the plant in the chemical recovery furnace and in a combination wood, coal and oil fired boiler. The Tanzania Electric Supply Company (TANESCO) will ex- tend its national power grid system into south-western Tanzania (para 5.25) and the mill will therefore utilize a combination of approximately equal proportions of TANESCO power, and power generated oni-site with a back pressure steam turbo-generator. Maintenance shops and equipment will be designed keeping in mind the isolation of the mill from any back-up facility. 2. Raw Material Supplies 5.10 Wood: When the project reaches noj5mal operating capacity in 1987 the total wood requirement will be 262,000 m annually. This wood will be supplied as follows: Sources of Pulpwood Average Distance Type Source R Amount to Paper Mill (m /annum) l<%) (km) Softwood: Sao Hill Pine Plantation 196,000 75 50 TWICO Sawmill Waste 15,000 6 60 Hardwood: Eucalyptus Plantations 21,000 8 90 Wattle Plantations 30,000 1i 170 262,000 1(0 Samples of wood from each of these sources have been tested for their pulping and paper making properties and found satisfactory for the grades to be pro- duced at Mufindi (Project File, ref. B1). 5.11 The Sao Hill pine plantations currently cover some 10,600 ha of successfully established stands. An additional 14,000 ha, financed by the  - 22 - Bank under the Sao Hill Forestry Project will be established during the period 1978-1981. The area required for this additional planting is available within the existing Forest Reserve. The land is open and without tree cover, requir- ing only minimal preparation prior to planting. The main species which has been planted successfully at Sao Hill in the past and is also to be planted in the future is Pinus patula. However, to avoid dependence on a single species, others like Pinus elliottii andl Eucalyptus grandis/saligna will continue to be planted. Eucalyptus is known to grow well over an 8-year rotation at Sao Hill although so far no pulpwood stands with eucalyptus have been established in the Forest Reserve. Nevertheless, there is eucalyptus available from other plantations in the region and this will ensure an adequate supply of this species in the first 2-3 years of mill operation. 5.12 Based on the growth rates which have actually been achieved, and with a generous 30% allowance for losses, the total pulpwood plantation area required to support the mill is 15,000 ha of which 10,600 ha have already been successfully established. This is only about 70% of the 22,100 ha of pulpwood plantations which are scheduled to be established by 1981. Neverthe- less, some such margin of safety is essential, particularly in view of the high proportion of poor stocking and failures in the 1975 through 1977 plant- ings, affecting about 50% of area inputs in those years. The Government has recognized the serious implications of this performance and has taken steps to strengthen the Forestry Project both in staff and equipment. The results of this strengthening has already positively affected the success rate of the plantings made in 1978. 5.13 An additional resource exists in the form of a 4,000 ha pine planta- tion in the region of Mbeya, some 240 km by rail from the Mufindi site and additional wood could be obtained from this area if required. The Government has agreed that the existing and planned Sao Hill plantations, the Mbeya plantations, and also any waste wood generated at the TWICO sawmill at Sao Hill, will be made available to the extent required for use by the project. 5.14 The pulp mill represents an obvious and potentially profitable out- let for over-mature wattle from the Tanganyika Wattle Company some 170 km from the mill-site and NDC has already had a positive response to its pre- liminary enquiries concerning wattle supply. NDC has agreed to enter into a suitable long-term arrangement for the supply of this material. 5.15 Coal: Although coal is not currently mined on a large scale in Tanzania, the Government has given assurances that coal from the large coal- fields near Mbeya will be available in the quantities required by the project. The coal will be transported by TAZARA to the Mufundi mill over a distance of about 260 km. To ensure the availability of coal for mill start-up, the State Mining Corporation is planning to expand production and stockpile from an existing small mine while the larger fields are being developed. Should the full requirement of coal not be available on time, the mill would have to use fuel oil which is available from the refinery near Dar es Salaam. This alter- native would, however, have rather serious cost implications as the equivalent price of coal, in calorific terms, is only about one half that of oil. Even when coal is available as the main fuel source, some fuel oil will be required for starting burners and for the lime kiln.  - 23 - 5.16 Other Materials and Chemicals: Limestone for the project is avail- able from several alternative locations in the project area and the State Mining Corporation is currently sampling and conducting chemical analyses to determine the most economic source for full-scale exploitation. Salt for the mill's chlorine and caustic soda plant is available on the coast and will be shipped by rail to the plant. Other chemical raw materials will, at least initially, have to be imported through Dar es Salaanm. 3. Environmental Impact and Protection 5.17 At the present time there are a few scattered and unplanned settle- ments in the area. A Ujamaa village is proposed nearby but its exact location will not be selected until the mill location is finalized. Although a full environmental impact study has not yet been carried out, the facilities pro- posed have been designed with a view to minimizing the undesirable environmen- tal aspects of a sulphate pulp and paper mill and no undue disturbance to residents in the area is anticipated. 5.18 There are as yet no Tanzanian standards for pollution control. In the project, however, provision has been made to keep the discharge of solid, liquid and gaseous wastes within internationally acceptable limits. Effluents from the mill if untreated would contain small amounts of toxic organic sulphur compounds, biochemical oxygen demand (BOD), suspended fiber and other particulates, color and odor. Treatments will include the stripping of con- taminated condensates with steam to remove organic sulphur compounds, the settling out of particulates by clarification, and secondary treatment of all effluent to reduce BOD by as much as 90%. With the proposed treatment system, Poyry has projected that the impact on the Kigogo-Ruaha will be approximately as follows: Effects of Paper Mill Discharge on River Water Characteristics Characteristic Normal River Flow Low River Flow BOD + 1.0 ppm + 2.5 ppm Susp. Solids + 1.7 ppm + 4.2 ppm Color + 40 units + 100 units The water is already characteristically greyish in ccolor although at low water flow the addition of the pulp mill effluent may produce an observable change towards brown. Suspended solids' information for the river water is not available but natural turbidity levels range from 10-70 ppm. The water will not be toxic to the aquatic ecosystem but during periods of low river flow, it is possible that slight but characteristic taste and smell phenomena will occur. As mentioned, about 40 km downstream from the proposed mill site, the Kigogo-Ruaha joins the larger Mnyera river, and no undesirable phenomena could persist beyond this point. The projected discharge characteristics are considered to be satisfactory and a monitoring program to verify this is planned. If necessary, additional facilities could be added to the mill to further improve the effluent.  - 24 - 5.19 Air emissions in a pulp and paper mill are primarily from the digest- ing system, the chemical recovery system and the lime kiln. In the case of the proposed Mufindi mill there will also be a potential for particulate and sulphurous emissions from the coal-burning power boiler. Process emissions are generally sulphur compounds (such as hydrogen sulphide, methyl mercaptan and others) and particulates. To reduce particulate emissions the mill design allows for an electrostatic precipitator on the recovery boiler, a recirculat- ing wet scrubber on the lime kiln, and multiple cyclones on the power boiler. To reduce odors, digester exhaust gases will be condensed, and the recovery boiler has been designed with an over-sized furnace. Some of the more recent advances in odor reduction technology (such as collection and incineration of non-condensible gases) which have been incorporated in the designs of large modern mills have not been proposed for the Mufindi mill as the size does not warrant such treatment and the mill's relative isolation should ensure that any nuisance effects remain minimal. NDC has agreed that the necessary anti- pollution measures as broadly described above will be installed in the mill and will be properly operated and monitored. C. Infrastructure 5.20 A number of infrastructural developments are required to support the project. The following table summarizes the estimated capital cost and tentative sources of financing for these developments: Infrastructure - Capital Requirement (T Sh Million) Financed by Financed Outside Item the Project the Project Total Power Line - 150.0 a/ 150.0 Railway Spur 16.8 9.0 b/ 25.8 Township and Forest Villages 12.8 97.2 c/ 110.0 d/ Escarpment Road - 101.3 e/ 101.3 Total 29.6 357.5 387.1 In US$ Million 3.7 44.7 48.4 a/ Finance to be arranged by TANESCO. b/ Portion financed by TAZARA. c/ Portion financed by the Government of Tanzania. d/ First phase of township development. This would eventually develop into a town for 6,000 inhabitants, at an estimated total cost of T Sh 240 million. e/ Financed by the European Development Fund. 5.21 Although it is proposed that about 90% of the infrastructural re- quirements be financed outside the project, the cost of such developments, amounting to more than 15% of the project cost, is an economic cost which must be considered in reviewing the economic rate of return of the project. This burden, together with the technical assistance package proposed, has the over- all effect of increasing the cost of the Tanzanian project by about 30% over  - 25 - and above what might be expected for a similar project in a country where the infrastructure and technology are already in place. 1/ 5.22 Railway Spur: The TAZARA railway passes within about 8 km of the proposed mill site, requiring a spur which will be partly financed under the project. Following its usual practice, TAZARA will engineer, construct and maintain the spur but would only finance the "recoverables" in the initial costs, such as the railway line and ties as well as the station which is needed at the access point of the spur at the main line. The remaining costs involved, including a bridge over the Kigogo-Ruaha, have been estimated on the basis of information provided by TAZARA and are included in the project cost estimates. 5.23 Township and Forest Villages: The project's capital cost estimate includes allowances for 20 houses for senior staff and a 20-room guest house. Furthermore, it has been estimated by the project sponsor that an additional 540 houses and other township facilities will be required for mill operating staff as well as several villages for forest workers. These will be financed separately by the Government and are thus not included in the project cost estimate. Nevertheless in evaluating the financial and economic returns of the project, housing costs have been included as an annual charge. 5.24 Escarpment Road: This 40 km road will provide a valuable transporta- tion link for the country giving ready access from tlhe whole Iringa region to the TAZARA railway. Although the road is essential to the project, it will also have far-reaching additional benefits. Agreement has been reached between the Government and the European Development Fund to finance construc- tion of this road. The cost of the road has therefore not been included in estimates of project cost and total financing required. 5.25 Power Line: A transmission line into South-western Tanzania is a part of the proposed extension of the national grid. Without the pulp and paper mill load, this extension would not likely take place until the early 1990's, but TANESCO has concluded that the mill load justifies immediate con- struction of the line. TANESCO is currently engaged in calling tenders for detailed engineering and is investigating possible sources of finance. 5.26 The Government has confirmed that arrangements for financing the infrastructure elements are well advanced and that the railway spur, the town- ship, the escarpment road and the power line will be implemented in a timely manner as required by the project. NDC has agreed to submit to the Bank quarterly reports describing physical progress of inf'rastructure implementa- tion. An implementation schedule for each of the above infrastructure invest- ments is included in the overall project schedule on page 30. 1/ In industrialized countries, costs of this type are often financed entirely by government. For an isolated mill now under construction in Canada, where the total investment is expected to be about US$300 mil- lion, grants and soft loans totalling US$80 million have been made by the Provincial and Federal Governments.  - 26 - D. Project Implementation and Management 5.27 An organization has been developed for project implementation and operation which includes: (i) the Company's Project Team; (ii) the Project Advisers, ASSI; (iii) the Project Managers, Sandwell, and (iv) the Project Engineers, Poyry. The main functions of each of these groups, and an organi- ation chart for project implementation, are shown in the two charts on the following pages. The Project 'eam which will eventually comprise a staff of 7-10 Tanzanian professionals has already been established within NDC and will be transferred to the Company when it (the Company) is formed. The present chief adviser to the Team, Mr. S. I. Husain, has been with NDC for several years and was formerly the Gen(eral Manager of Packages, Ltd., a successful pulp and paper company in Pakistan in which IFC has invested. He will be joined shortly by a Tanzanian Project Team Chief (not yet appointed) who is expected to become the Company's General Manager and who will contribute to continuity during the transition from project execution to operations. 5.28 NDC does not have any previous experience in constructing and oper- ating a pulp and paper mill of this size. To strengthen the Company's (and the Project Team's) technical capabilities to supervise the Project Managers and Project Engineers, and the commissioning and initial plant operations, NDC has appointed ASSI as Project Advisers. Under the assistance agreement negotiated between NDC and ASSI, ASSI will advise NDC on all technical matters relating to the engineering, design, equipment procurement and plant commis- sioning and operation. In addition, ASSI will organize for NDC the training of Tanzanian technicians and managing personnel. The major impact of ASSI's role will be in ensuring that the organization functions efficiently and eco- nomically and that qualified personnel will be available quickly when required to perform functions not being handled by others. The initial contract is for a term of 5 years from the time financing is secured for the project, with provisions for extensions on terms to be agreed. ASSI will be paid a royalty of US$225,000 per year, and the cost (including overhead, travel and living expenses) for managerial and technical personnel provided by ASSI to the pro- ject is estimated at US$6,250 per man-month. This assistance package and its cost have been approved by the Government and have been found satisfactory by the Bank. 5.29 ASSI was formed by the Swedish Government in the 1930's with the objective of fostering development in the more remote parts of northern Sweden where private corporations were reluctant to go. Today the company is one of Sweden's largest forest industrial enterprises with 17 production plants in the country, and is Sweden's largest producer of packaging grades of paper and paperboard. Other ASSI operations include converting plants in the U.K., Denmark and Switzerland, and sales outlets in many countries in Western Europe. ASSI has been generally profitable, although in 1976 and 1977, financial performance declined in parallel with that of other major Swedish companies in the paper industry.  -27- RESPONSIBILITIES FOR PROJECT IMPLEMENTATION NAVNSAL DEVEli PIll T COKFPRATJON Proje,t Sl-onsor on behalofof the C-ernnCt of Taneania and owner of the Southern PaPer Iill. Coep.ny Limited. * SupervtIson of a11 oper-tio-l o Lisbon jIth Cove--nant 1).partwonts ed local _ _ ' *iCr_ Ion oi cetr .t..5. oppli,rr. and the C.7nCh icell of COnttOCtS o i'rr'ie Otcron of Pr-greOs iep trr no the C ovenfLent mod to .he finan.ri-o. PRO.,eCT ADVISERS PiLfJECT jW..AGE,iiS (ASS!) (SAiIIIIIELL) ' Advis.e NDC on all aspect. of project developeent * Advioe on org-niationaS structure of the * tepre ...t NIlC in the Compant.ygaiztis end op-erviOlon of the project during a t o ol implenentatLwn * Advire on s m...f.cturslg *nd proc ..1II proposls * Prepare end -iai.tain project ioaple.eetation end syst.mon schedule a X-In. *nd ppr- p.cifl, fo iovitati... to teoder and r-nie bids t.oth * Develop a projeCt reporting sy.tn and report techoicily and --oreioljy regularly On pr-jeet progress - -1.- - er mllt ie ih enttantot and ,Ppare and ,rlnt.s work plaic. pr..renntiers and Onriut ii wIjt eLen pla. aed hudigets bntrpo.rurpra okpao rcrsn * Prepare and operAte coet control epetem plan., budget. _nd cot control W ' ork with the Prcject togineerc in coeiolog desigog gnd hbo. Iding asil hl hIch i utalee I tdi' .tsi.con and -Inpanogeti thiteenin for TTn.aniun -, dition c * Advise on wster rold air efsiseol etmndards' *Advie ndonetl -od rop-rt prod-it oorkrtLI. * Maeck and eppro-e tender apnclficatio and sad di.s"rIhtLcmn iLoitatlo.s tu bid; rlu.tr bid. sad Rg.e rgco-e dtdatlona tv SDC and ASI a Sup'i.ine the cofri,ni ng of the pro--t to * A,elen in defin cn. roordin-trlg and rons ortnu __________________________n rtho progreonl of ;rrs rk. out,ide rhe prejcrt. S.. the r-Ji-uY link ro,du. the nill t-onlhip Lnd new w teriol . uppIe_ 'With the help of tire ireojct fnoin, rn- an*s.it .,C dC snort t uitabl eonr, Ict-r ilr ric_ _ work. and foe qIlp.ent colotion. *nd aup"r.Is _ their work ' Assist Nb5C in nogotiatione with sontrortorasoad I supplier.Isod preptoc and opodite purchar- t orders end ICtter. ol credit Prepare end clhcck a11 In aonea *od bills of PROJiCT P RS q-ntitien ond qoalitie. s Por F R * Pollet up the progros. of the S.* Rill fereotry (1-0yKY) pl.ating pr.grr nnd nuicrvlne the d-eleprent * Work with the Prrjet hLt.-nagr.r to denelep for lsggiog debarking nd tranaport.tien of wood eppr-printr engiorrler doc art sod * design ' Aaeist ASSIn sepep-ising and -gcriingteri tiler ill concett, sod O.k negeni progrn- n the renarructlr.n bud ot ..ticaten and tila trraitng pregrac .cheduCe a Prepare production plane, acounting and quality a rCep,lre p-rIficatIne r ..ntrution nd control synt_os. sainteDnca sch-dulcc. oerarting * ere. quality reuonsta end Corls. y.t - .c o. erectionl mthod., q .nlty reur-.nt.s.ad manua.. es.tc. stan'dardls a Supervie tir transition frec plant con.truotitn a Prepare t-rtural, neeh-ical. electriral and to Pr _ t intrrnrnottion decigrn and provide all engineCring infor.-tion for the aucesnivl i.plenerta.tion of tre project 'Prrlare Orn,lrr deerortnt ior btidding for civi] work and for rh, sspyly of pp tchiosry iryng clctricl cqu-yr-Lt preer-n conttr= Insulation, parra and a11 other allied itene * frepare technical onaloatiena of tondorn and esfet is ite consequent selection of equipsent and suppliers